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On Monday Kraft (KFT) begins its new life as two new companies:
Kraft Foods Group (KRFT) and Mondelez International (MDLZ).
In fact, both stocks trade on a when issued basis already.

Although KFT has been a great investment over the past couple of
years, looking at the two new components of KFT reveals the
purpose of the split. For every 30 KFT shares held, KFT
owners will receive 30 share of MDLZ and ten shares of KRFT.
Recently the two new companies’ management teams made
presentations and KFT responded poorly because the earnings
guidance of the new bits of KFT added up to less than the prior
guidance for the whole.

But when you look at each company, the figures aren’t that bad.
KRFT, the North American grocery business, will pay a $2 dividend
and based on the when-issued price yields 4.4%. Although that
represents a heft 77% payout ratio, low single digit revenue
growth with modest operating leverage should leave this
comfortably covered since they sell into less economically
sensitive sectors.

Meanwhile MDLZ is guiding to $1.55 EPS which gives it a P/E of
just over 17, not especially high for a global snack company with
decent emerging markets growth.

Together, the two companies’ guidance adds up to $2.30-2.40 for
the old KFT, whereas KFT itself had been guiding to $2.60-2.80.
It was this disappointment, that the sum of the parts was less
than the whole, that pushed the stock down.

But here there’s probably a little gamesmanship going on. Neither
management team of the new companies “owns” the prior guidance,
and both are most likely motivated to be cautious, both because
of the transition to independence but also because options are no
doubt being priced. It’s still the same company, with the same
strong brands and growth prospects. So we think the two pieces of
the old KFT remain reasonably attractive as an investment. We
think it’s also interesting to be long KFT hedged with a short
position in the Consumer Staples ETF (XLP).